Governance issues led a pair of fund managers to sell all of their Facebook (FB) shares earlier this year, despite holding positive views on US equities in general.
Both Neptune’s Robin Geffen and Artemis’s Simon Edelsten have high weightings to the US in their global funds, at around 50% and 60% respectively, including the tech FAANG stocks.
However, Geffen, who manages the Neptune Balanced fund, says that while the US IT sector will be the main profit engines worldwide in the future, “we cannot be indiscriminate”.
For Geffen, a recent trip to the Facebook headquarters in Silicon Valley with his chief economist James Dowey prompted him to offload his holding in the social media giant, just weeks before the stock slumped by 20%.
Geffen and Dowey attended an investor relations function in June, and the impression the firm made was lasting. In fact, Geffen says, “it was one of the worst three meetings I’ve ever had in my entire career”.
“It was like going to a university campus on the first day of term when there are hundreds of freshers milling around,” he explained. “Everywhere we went we were high-fived – it was like being at a frat party.
“We were given Coca-Cola and cake and ice cream and everything we wanted to eat. Didn’t see much evidence of work being done; didn’t surprise us that there’d been a 57% increase in the workforce.”
In fact, no one seemed to even know where the event he had flown over for was taking place, which Geffen describes as “extraordinary”.
“And they couldn’t answer any of my key seven questions. It became quite clear that strategy at Facebook really is whatever chief executive and founder Mark Zuckerberg wakes up in the morning and decides to do that day.
“I came out of it and said to James ‘we’ve got no choice, we’re going to have to sell that’. Thank goodness we did, as there was massive fall when the results came out.”
Offloading Tech Stocks
Edelsten, manager of the Morningstar Silver Rated Mid Wynd International (MWY) sold much earlier – in late 2017, around the same time he sold Amazon (AMZN) and Tencent (00700).
When the Cambridge Analytica scandal broke earlier this year, that looked like an excellent decision. But the firm bounced back and went on to hit a new record high, before the disappointing first-quarter numbers.
“Selling Amazon has been a complete disaster because it has doubled,” Edelsten admits. “Facebook, of course, has been a very good thing to have sold.”
Worries over governance began when Zuckerberg floated the idea of creating a third class of share, a “C class”, which would carry no voting rights. The firm already has “A” and “B” classes of shares, the former of which, available to most investors, carry just one vote per share, compared to the latter’s 10. “B” shares are owned by mostly by Zuckerberg himself.
“The London Stock Exchange stopped people having restrictive voting rights a decade ago. We regard it as Victorian; you don’t expect these habits to recur in San Francisco. So we took a negative attitude there,” says Edelsten.
“That sort of arrogance then feeds through to not being able to deal with issues like the Russians using your website to fiddle around with elections. They haven’t shown an ability to handle a massive high-profile media company in the face of political issues and a media business will always be a political business.”
As an overall point, Geffen says he likes the US: “The US consumer looks good and it’s got a lot of high-quality companies.”
However, he does sound a note of caution on the larger, more well-known names in the index. “Not all these FAANGs are equal – you need to distinguish.”
Indeed, he notes that, when Facebook and Google (GOOGL) join Twitter (TWTR) in the S&P Communications Services sector in the forthcoming reshuffle, they will be the only stocks in the sector that aren’t heavily regulated. “No prizes for guessing where that one’s going,” he says.
“So, do I think those companies are going to be on the same trajectory as somebody like Amazon? No. Apple? No. And, indeed, Netflix? No.
“When people say FAANGs, they are not all the same; one needs to distinguish very carefully. I’m not going back to Facebook anytime soon, and I’ve never owned Twitter, I’m proud to say.”
Alphabet, Google’s parent company, is, though the second-largest holding in the Neptune Balanced fund, behind Amazon. Apple (AAPL) is number five.
While he doesn’t own Netflix (NFLX), Edelsten has recently initiated a position in the firm despite being rather dismissive of it late last year. “I was extremely rude about Netflix a year ago,” he admits.
“My point about Netflix was that unless they managed to put their subscription rate up and still show that they can grow their subs in total then you couldn’t value it. Then they put their subs rate up and they carried on growing subs, so lo and behold, you can hold it.”
As a result, it’s now a 1% position in the fund, which is already up 35%. “I think 1% is enough. It is a very difficult stock to value, but you can value it now, whereas in the past you couldn’t.”
